Tax and Relief on P2P lending

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Audrey White
7th January 2016

Lets face it, HRMC have been pretty kind to us P2P platforms and lenders…

Legally, we could have been made to withhold tax on interest earnings at 20%. Lack of enforcement has been an indirect subsidy as it has allowed lenders to compound their gross earnings. P2P lenders are expected to declare their earnings on their self assessment forms, due imminently. Whereas platforms are required to submit an Other Interest report so that treasury are informed about who earns what.

The newly regulated P2P lending industry is growing up and the government is helping.

Things will change from 6th April 2016…

The UK government may offer relief to P2P lenders for irrecoverable loans. So lenders can use next year’s tax deductions towards current bad debt relief, allowing you to substitute one deduction for another. Hurray!

Interim rules have recently been published by Treasury, but will change once formalised. We’ll confirm once published, but we have an idea of what’s likely to happen. We’re expecting that platforms will need to deduct 20% of interest earnings as received from lenders. We will change the ‘Fees’ tile on the dashboard to ‘Deductions’ and show the detail on the pop-up.

The IF-ISA excludes ‘Wrapped’ microloans from taxation

So lenders without any taxable income cannot use bad debt relief. Unless they use more than one platform, in which case taxes accrued in one platform may offset losses from another.

We’ll have more info on the IF-ISA very soon.

rebuildingsociety CEO Daniel Rajkumar says:

“The Crown is sharing in some of the risk of lending to SME’s. Hopefully this will manifest itself with a widening of risk appetite and further support for the productive SME economy.

Equity crowdfunding enjoys great relief through EIS & SEIS, so its great to see similar incentives applied to credit based lending.”

It’s bitter-sweet

They say that the only things that are certain are death and taxes… We knew this was coming, so we’re grateful for the:

– all of which soften the pain.

Net earnings may not reduce

With gross yields near 15%, a 20% tax will clip yields to 12%, that’s an overall deduction of 3%. So on a portfolio of £100k invested, £3k which would be taxed can go towards bad debt instead. Many lenders without bad debt will have an allowance that can be traded for non-performing loans.

Total interest pay-outs are expected to exceed £1.5m for next tax period across all lenders, at 20% this would net the Crown circa £300k. This is about the amount we have in defaults, we are expecting to recover £100k, but defaults will rise as some businesses fail. If lenders are able to maintain losses below 3% of your portfolio (and yields at 15%) then you’ll suffer no more loss from bad debt, than you would from taxation.

Its important to re-iterate that decisions on interest earnings taxation is still pending, but we believe that from April 2017, platforms are likely to have to deduct 20% from most lenders (depending on their tax bracket).

Risk appetite…

We’re working on a ‘non-performing loans’ or ‘tertiary market’ where risk adverse lenders can sell underperforming loans however they wish and optimistic buyers may find a deal. More on that at the lender’s evening next Thursday.

Hope to see you there.

Photo credit to: Kadellar

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